IMF leadership

The IMF needs a European leader

Continuity rather than tradition should guide the choice of IMF managing director to help resolve Europe's sovereign debt crisis.
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Dominique Strauss-Kahn appearing at Manhattan Criminal Court
<div style="text-align: left;"> Dominique Strauss-Kahn appearing at Manhattan Criminal Court </div>

The nationality of the managing director of the International Monetary Fund (IMF) shouldn’t matter, but clearly it does.

Now that Dominique Strauss-Kahn has stepped down after his arrest last weekend for the alleged sexual assault of a maid in a New York hotel, it is important that his replacement can drive initiatives towards a resolution of the eurozone sovereign debt crisis, gain the confidence of capital markets and maintain the goodwill of key political players.

There is no shortage of credible candidates with administrative experience, political savvy and economic literacy, or who can boast of a reasonable degree of domestic or international achievement to fill out their job applications and who still have the energy to take on another challenge.

Of course, each would have their detractors too. Ideally, a consensus will develop that leads to an appointment based on merit. But, even on a level playing field, the merits of different candidates can be difficult to distinguish. Ultimately, politics is likely to be the key determinant for the choice and, perhaps most important, finding someone who can work with rather than alienate European leaders.

One of the most important of these, German chancellor Angela Merkel, has been quick to state her preference for another European IMF boss. In addition to ante-post favourite French finance minister Christine Lagarde, another insider, the former head of Germany’s Bundesbank Axel Weber has emerged as a possible managing director. The argument for acceding to the wishes of Merkel and other European leaders seems compelling.

The EU faces a crisis, and it needs the IMF on its side. Whatever the flaws of the current strategy to resolve that crisis, it is hard to see how it can be improved by introducing a potentially disruptive influence with an alternative geo-political agenda. It’s surely facile to assume that an “outsider” can bring a fresh look to Europe’s debt problems and to the undoubted fiscal and monetary policy contradictions inherent in the union itself.

Abandoning a softly-softly approach, one that provides conditional loans while allowing essential room for economic growth might force some hard decisions on member countries, but it might also cause the break-up of the union.

After drifting for several years in the 2000s, the IMF was injected with new purpose during the global financial crisis. Under Strauss-Kahn’s leadership since November 2007, the fund has played a key role in tackling so-called peripheral Europe’s rolling sovereign debt problems. Its emergency lending rose from less than $2 billion in 2007 to almost $92 billion last year, as it worked with the EU to bail out Greece, Ireland and most recently Portugal.

Critics fear that these rescues are merely palliatives, delaying the tough medicine that debt-burdened countries must eventually take, and each time shifting attention to the next patient on life support. But, imposing the bitter pill of debt restructuring now — as Greece is under increasing pressure to accept — might poison the balance sheets of already vulnerable commercial banks and even the stability of the European Central Bank, which has been effectively funding problem countries and taking their bonds as collateral.

Currency devaluation, the other usual prescription, is impossible unless a political decision is made to dismantle the single European currency. There are plenty of people who think that would be no bad thing. But, if one country were to leave, that would simply invite speculation as to which would be next. The “rolling crisis” would enter a new level.

Besides, a valid criticism of the IMF in the past has been its intrusion into countries’ sovereign autonomy. Too often, conditionality for emergency loans has had an ideological dimension that also served the commercial interests of foreign governments, banks and companies. Several Asian countries have good reasons to resent the demands it made on them more than a decade ago when the region faced its own crisis. They are also justified in complaining about double-standards now that Europe is on the ropes.

But, retribution for past misdeeds is hardly the basis of good policy. The IMF has no business dictating the political future of Europe; instead, as critics of its actions in earlier times have argued, it should facilitate the achievement of financial stability without undermining sovereign goals.

That task would be made easier if the new IMF leader has the confidence of EU leaders, as well as the US, the fund’s major shareholder.

Earlier this week, China’s foreign ministry spokeswoman Jiang Yu said that any selection process should be “fair, transparent” and aimed at finding the best person for the job; while former Bank of Canada governor David Dodge stressed that the choice of the next IMF leader “should be absolutely merit-based”, and that “it would be very nice to have someone who has at least deep roots in, if not necessarily a current representative of, one of the major emerging-market countries”.

Several people have been touted as possible candidates this week — whether they are interested in the job or not. These include front-runners, Kemel Dervis, Turkey’s former economic affairs minister, and Trevor Manuel, ex-minister of finance in South Africa and former head of the World Bank Development Committee. India’s Montek Singh Ahluwalia has been mentioned, as well as China’s Min Zhu, who is a special adviser to Strauss-Khan, and Singapore’s minister of finance Tharman Shanmugaratnam, who is also chairman of the IMF’s oversight panel. From Latin America, Armino Fraga, head of Brazil’s central bank a decade ago, and Agustin Carstens, governor of the Bank of Mexico and former IMF deputy managing director, have been suggested.

The position has been held by a European since the IMF’s inception after the Bretton Woods Conference in 1944, when the organisation’s role was designed to help the recovery of the post-war global economy by stabilising exchange rates and assisting in the restoration of the international payments system. The World Bank was conceived at the same time, charged with providing conditional lending to countries for development and reconstruction, and its top job has by custom been held by an American.

However, it is not tradition but continuity that should determine any new appointment. The failures of both Bretton Woods organisations to act independently of the US Treasury and think beyond dogma-ridden templates to help manage the Asian financial crisis in the late-90s, and the subsequent rapid rise of emerging economies during the past decade, undermines the cosy carve-up of the key roles. Their integrity suffered, and meanwhile economic power and influence has shifted.

Yet, despite the appeal of moving from an anachronistic practice and the obvious qualities of possible contenders from non-western European countries, now is hardly the best time for a change.

¬ Haymarket Media Limited. All rights reserved.
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